The UN General Assembly’s landmark resolution to create a legal framework for sovereign debt restructuring will change how future debt crisis are managed. Although European Union countries are vulnerable to vulture funds, which recently held Argentina to ransom, some EU nations voted against, writes Bodo Ellmers.
Bodo Ellmers is policy and advocacy manager at the European Network on Debt and Development (Eurodad).
The UN General Assembly has passed a landmark resolution that mandates the UN to create a “multilateral legal framework for sovereign debt restructuring”. Prompted by the G77 countries, and triggered by the aggressive “vulture funds” lawsuits against Argentina, this resolution could be a game changer for the way future debt crises are managed. It has shifted the forum for political debate away from the International Monetary Fund (IMF) and towards the UN.
The EU’s vote was split over this crucial decision. Shamefully, a small number of member states voted against the resolution, even though it could also provide more protection to EU nations in debt distress.
The path towards a real debt restructuring regime
It is certainly not news that the lack of a legal framework for sovereign debt restructuring – a state insolvency regime – has been a gaping hole in the international financial architecture. The EU’s ‘muddling through’ in the Euro crisis is the best example that there no binding and predictable procedures for dealing with debt crises. However, governments from both debtor and creditor countries have so far been reluctant to put their political weight behind any meaningful initiative. Even the global financial crisis has not led to anything concrete since 2008.
It was civil society campaigns that kept the flame burning until the issue was picked up last year by the staff of international organisations, when the International Monetary Fund issued a staff paper, and the UN set up expert groups on ”new debt workout mechanisms” at the UN Conference on Trade and Development (UNCTAD) and the UN Department of Economic and Social Affairs (DESA).
Then came the rather surreal vulture fund lawsuit of NML Capital vs Argentina at a provincial court in the US state of New York. Vulture funds are predatory hedge funds that buy bonds of debt crises countries at rock-bottom prices on the secondary market. They refuse to participate in debt restructurings. They then sue the indebted nation for full payment, aiming to get a much better deal than the ‘collaborative’ creditors who agree to write off a share of their claims in order to get a debtor back on its feet. US Judge Thomas Griesa ruled that Argentina must to pay out the vultures in full, guaranteeing them a profit of 1,600% of their investment, and a much better deal than the other creditors got.
Unwittingly, he also kicked the status quo into the dustbin. All experts agree that debt restructurings as we used to know them, which depended on the voluntary participation of creditors, simply don’t work anymore if holdout creditors can achieve full payment through litigation. Restructuring decisions must be binding for all creditors and must be enforceable, hence the need for a multilateral legal framework.
Argentina’s bold move of proposing a UN General Assembly (UNGA) Resolution – and successful mobilisation of the whole G77 including China – represents a long overdue political breakthrough. Finally, a critical mass of governments is willing to act. The resolution was voted on 9 September 2014, and was passed with a large majority: 124 UN member states voted in favour, 41 abstained, and only 11 voted against. The vast majority of EU countries abstained. Speaking on behalf of the EU, Italy stated that the key reason was the speed of the G77 initiative. Ahead of the vote, a large coalition of European civil society organisations, including Eurodad, called on European governments to vote in favour of the resolution. This may have helped to shift some European votes from “no” to abstention.
The Czech Republic, Finland, Germany, Hungary, Ireland, and the UK voted against. Those six EU nations that voted against a resolution that could stop vulture funds holding countries to ransom should be ashamed. This continent is currently the most vulnerable to debt crises and in urgent need of better insolvency regimes. Vulture funds have already started to buy up bad loans in countries affected by the euro crisis, and if action is not taken we could see a repeat of the Argentina case within the EU.